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Searching and Learning by Trial and Error

  • Steven Callander

I study a dynamic model of trial-and-error search in which agents do not have complete knowledge of how choices are mapped into outcomes. Agents learn about the mapping by observing the choices of earlier agents and the outcomes that are realized. The key novelty is that the mapping is represented as the realized path of a Brownian motion. I characterize for this environment the optimal behavior each period as well as the trajectory of experimentation and learning through time. Applied to new product development, the model shares features of the data with the well-known Product Life Cycle. (JEL D81, D83, D92, L26)

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 101 (2011)
Issue (Month): 6 (October)
Pages: 2277-2308

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Handle: RePEc:aea:aecrev:v:101:y:2011:i:6:p:2277-2308
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  1. Boyan Jovanovic & Yaw Nyarko, 1994. "Learning By Doing and the Choice of Technology," NBER Working Papers 4739, National Bureau of Economic Research, Inc.
  2. Aghion, Philippe, et al, 1991. "Optimal Learning by Experimentation," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 621-54, July.
  3. Mansfield, Edwin & Schwartz, Mark & Wagner, Samuel, 1981. "Imitation Costs and Patents: An Empirical Study," Economic Journal, Royal Economic Society, vol. 91(364), pages 907-18, December.
  4. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-83, June.
  5. Stefan H. Thomke, 1998. "Managing Experimentation in the Design of New Products," Management Science, INFORMS, vol. 44(6), pages 743-762, June.
  6. Robert Gibbons, 2010. "Inside Organizations: Pricing, Politics, and Path Dependence," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 337-365, 09.
  7. Aghion Philippe & Bolton, Patrick & Harris Christopher & Jullien Bruno, 1991. "Optimal learning by experimentation," CEPREMAP Working Papers (Couverture Orange) 9104, CEPREMAP.
  8. Lee Fleming, 2001. "Recombinant Uncertainty in Technological Search," Management Science, INFORMS, vol. 47(1), pages 117-132, January.
  9. Coscelli, Andrea & Shum, Matthew, 2004. "An empirical model of learning and patient spillovers in new drug entry," Journal of Econometrics, Elsevier, vol. 122(2), pages 213-246, October.
  10. Daniel A. Levinthal, 1997. "Adaptation on Rugged Landscapes," Management Science, INFORMS, vol. 43(7), pages 934-950, July.
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